Tonight's CPI data may kill the prospects of Fed rate hikes! Is it difficult to stop gold from rising unexpectedly?

While U.S. labor costs still have room to rise, the market expects tonight's CPI data to show a slowdown in inflation. Analysts said that even if the data unexpectedly rises, gold buying will still dominate the market...

Thursday's inflation report, if the data slows, could kill the prospect of a Fed rate hike at its next meeting, despite signs that the labor market remains strong.

Fed officials are keeping an eye on the consumer price index and other data, and they are considering whether it will be necessary to raise interest rates again this year to keep inflation down.

Economists polled by The Wall Street Journal estimated that the CPI was 0.3% m/m and 3.6% y/y in September. This is a cooling from August's 0.6% monthly rate and 3.7% annual rate, which was driven by higher energy prices.

Excluding volatile food and energy items, these economists expect the core CPI to also rise 0.3 percent in September, the same pace as the previous month and continuing a mild trend throughout the summer. They estimated the core CPI y/y at 4.1% in September, down from 4.3% last month.

Continued slow growth in core prices, combined with a slowdown in wage growth and a jump in bond yields, could lead Fed policymakers to conclude that further rate hikes are not necessary this year. If that's the case, the recent spate of rate hikes may have peaked after the benchmark federal funds rate rose to its highest level in 22 years. The US Department of Labor will release the September CPI report at 20:30 Beijing time.

Fed Chairman Jerome Powell stressed after his decision in September to leave interest rates unchanged that officials will set monetary policy based on new data, and Thursday's CPI report will provide data to judge the effectiveness of the Fed's actions to fight inflation.

Lara Rhame, chief U.S. analyst at FS Investments, said, "The Fed can certainly claim progress on inflation. But they must not claim victory. ”

Is the Fed's biggest concern about rising labor costs?

Fed officials want to see core prices continue to cool, especially in the services sector, which is often more closely linked to labor costs than commodity prices.

Despite last month's strong hiring performance, the pace of wage increases for workers has slowed recently. Hourly earnings rose just 0.2 percent in September, up 4.2 percent from a year earlier. Over the past three months, its annual rate has been even lower, and if it continues, it will be in line with the 2% target.

However, with unemployment below 4% and layoffs not rising significantly, workers have not lost all the advantages they gained during the recovery from the pandemic. The strike by members of the United Auto Workers (UAW), Kaiser Permanent Healthcare employees, and recent sharp wage increases in other union contracts could push up wages for workers across the economy.

Carl Tannenbaum, chief economist at the Northern Trust, said: "This could put pressure on prices for essential services, one of the last areas where the performance is still not as good as we would like." ”

Inflation growth slowed in September and has eased in recent weeks, despite higher overall inflation in August, according to the U.S. Energy Administration (EIA). Oil prices could rise again due to the war in the Middle East. Earlier this week, the war in the Middle East pushed up oil prices.

The Fed is not targeting commodity prices that are less sensitive to changes in interest rates, but higher gasoline prices could still dent consumer confidence and spending, and affect the cost of other products such as airline tickets and shipping.

The sell-off in the bond market has also obscured the prospects for curbing inflation without triggering a recession, the so-called soft landing. The Fed raised short-term interest rates to curb inflation by slowing economic growth. The process is designed to push up long-term bond yields, which in turn push up borrowing costs for housing, automobiles and other commodities. However, yields on these bonds recently hit 16-year highs, significantly tightening credit conditions. Higher interest rates could further slow the housing market and dampen consumer spending.

San Francisco Fed President Daley said last week that the need for further action by the Fed in this context has "diminished."

The upside of the data is also difficult to stop gold buying from dominating the market

Analyst Barani Krishnan pointed out the impact of different CPI data on the dollar.

Scenario 1: CPI remains constant or higher.

If the CPI figures remain unchanged or higher, we are likely to see a rebound to the 5-day moving average at 106.00, while the previous day's high of 106.25 will become the next resistance level.

If the USD continues to rise, a further recovery towards the 106.60-106.70 level is expected.

Scenario 2: CPI is lower than expected.

Should CPI data show a decline, the current downside correction for the USD could extend further to 105.55 and reach the key support at 105.40. It is likely to break further below this major support and correct further, with targets likely to be 104.80 and 104.40.

Analyst Joshua Gibson believes that the US CPI annual rate in September is expected to decline slightly from 3.7% to 3.6%, and the unexpected upside of the data may lead to a resurgence of inflation concerns, thus prompting the dollar to rise again strongly. But at the same time, inflows into the dollar remained limited, and gold traders failed to dominate the market further. Gold buying faces a challenge to the 50-day moving average (around $1900).